Will the US practice of paying NEDs in shares catch on?
The Cadbury code recommendation that listed businesses should have at least three non-executive directors (NEDs) has focused attention not only on how to attract the best to a company but how to get good value from them, once lured. Talk of key incentives is homing in on the US practice of payment in shares.
The American practice is widespread and gives a few clues on the subject.
President of the National Association of Corporate Directors (NACD) John Nash says: 'If a company can't (pay entirely in shares) immediately, they should start with at least 50%, working towards 100%. All directors should also undertake to purchase a certain number of shares when they take up their position.' This approach has already been embraced by a substantial chunk of the Fortune 500. Campbell Soup Co, for example, requires its directors to buy 3,000 shares out of their own pockets; at around $48 per share, that's a real show of commitment.
In the UK, Glaxo Wellcome has kicked off by paying its NEDs 15% of their fees in shares. 'It helps to better align the interests of non-executives and shareholders,' says a spokesman, though he concedes that many NEDs have been buying shares informally for some time.
The world of fund management is also in favour. Hermes Investment Management plumps for around the 50% mark. 'NEDs should not be treated as employees,' comments Peter Butler, corporate focus director. 'Their independence should not be compromised. But paying them in shares doesn't do that.' Yet he cautions against some aspects of the American system. 'Over here, the American view that non-execs should hold over $100,000 in shares is meaningless.
If we set, say, a £50,000 minimum it would deter many from putting themselves forward.' Others are more reticent. John Garbutt of HSBC Asset Management welcomes some payment in shares but suggests that 25% would be more appropriate. 'It's a useful adjunct, rather than imperative,' he says.
Susan Bloch, director of executive coaching consultancy GHN, disagrees.
'In many cases non-executive directors don't have a common commercial interest; these directorships are something many people take up when they retire. The big question is: how well do they understand the role?' she says. To ensure common commercial interest Bloch suggests payment of about 50% of fees in shares, pointing out that a chunky holding 'stops you nodding when you should be challenging'.